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HMRC internal manual

Capital Gains Manual

Leases: granting of a lease: reverse premiums

A ‘reverse premium’ is a sum paid by the landlord in order to induce the tenant to enter into the lease. Reverse premiums are a common feature of lettings of commercial properties. Typical situations in which the payment of reverse premiums may be met are:

  • where a developer wishes to sell a newly built office block to an investment company and wishes the property to be fully let at the time of the sale;
  • where the developer of a shopping centre wishes to secure a well-known name (often referred to as an ‘anchor tenant’) in order to attract other tenants to the development.

A payment made by a tenant, either to surrender or assign an onerous lease, may also be referred to as a reverse premium. The treatment of such payments is covered at CG71264.

A more comprehensive explanation of the commercial background to reverse premiums is contained at BIM41050 onwards.

Recipient of Reverse Premium

The recipient of a reverse premium will often contend that the receipt is not chargeable to tax. This contention may be correct, but not always. Each case must be considered on its own particular facts.

The first question to be considered is whether the receipt is chargeable as a trade receipt in the hands of a tenant who is granted the lease for the purposes of a trade, profession or vocation, or in all other circumstances as a receipt of a property business. Guidance on this question can be found at BIM41050 onwards.

If the receipt cannot be charged to Corporation Tax or Income Tax as a trade receipt, or receipt of a property business, you will need to consider whether it is chargeable to Capital Gains Tax or Corporation Tax on Capital Gains.

It will only be so chargeable if it is derived from an asset held by the tenant. Normally, the reverse premium will be paid before the tenant has actually entered into the lease and in these circumstances it will not be possible to demonstrate that the reverse premium is derived from the lease. Unless there is some other asset from which the reverse premium derived, it will not be chargeable to Capital Gains Tax or Corporation Tax on Capital Gains.

However, it is important to establish the full facts. It may, in some limited circumstances, be possible to show that the receipt derives from some capital asset other than the lease. Possible examples are:

  • the tenant may have surrendered an existing lease in order to take the new one and the receipt may, in reality, be for the surrender of the old lease;
  • the receipt may derive from the tenant’s goodwill.

The above examples are not exhaustive, there may be other possibilities depending on the precise facts of each case.

Payer of Reverse Premium

A reverse premium which has been paid by a landlord will normally be deductible under TCGA92/S38 (1) (b) as being expenditure incurred for the purpose of enhancing the value of the landlord’s interest in the land. This is because by securing the rental income payable under the lease, the value of the freehold reversion, or superior leasehold interest, will normally be enhanced.

No deduction will be due if the effect of the expenditure is not reflected in the state or nature of the landlord’s interest at the date of disposal, for example if the lease has come to an end.

A deduction may not be due if it can be shown that the bargain between the landlord and tenant was cut and dried on terms which did not include the payment of a reverse premium but was subsequently rewritten for no obvious commercial reasons to include the reverse premium.